Colombia - Economic Briefing November 2003

Referendum Issues Approved but Low Voter Turnout Nullifies Election

On 25 October, Colombians overwhelmingly endorsed the government’s economic and political reform agenda contained in the referendum. However, since the voter turnout was below the required minimum, the referendum was ruled invalid by election authorities. The government will now have to resort to legislative approval of measures needed to regain fiscal footing.

Government-led referendum fails due to low voter turnout
The nationwide referendum, which sought approval of key political and fiscal reforms, took place on 25 October. Even though voters approved all of the government’s measures by overwhelming majorities, the minimum quorum of 25% of eligible voters was not achieved for any of the 15 questions raised in the referendum. Lacking the minimum voter turnout the referendum was ruled invalid.

A clear voter endorsement was considered essential in providing a more sustainable footing for fiscal accounts and was seen as a key to boost the Uribe administration’s mandate to advance with the government’s political agenda of strengthening security and essential economic reforms. Gubernatorial and municipal elections dealt the president another blow, as independent left-of-centre candidates made headway in key cities. In the capital Bogotá, a former communist and trade union leader, Luis Eduardo ‘Lucho’ Garzón, was elected mayor. His left-of-centre party, the Independent Democratic Pole (PDI, Polo Democrático Independiente), was also victorious in Cali and Medellín, the country’s second and third largest cities.

Despite the defeat of the referendum, Uribe’s popularity ratings continued to stand their ground with more than 70% of the population endorsing the President’s current political agenda. Nevertheless, the political landscape is likely to be more challenging. Even though the President belongs to the Liberal Party, he has generally strived for the independent path during his term. However, the leadership of the Liberals endorsed the PDI in several elections. As a result of the good PDI showing, the President will now have to regenerate his political alliances, which may require cabinet changes and outright concessions on his fiscal agenda that could jeopardize the established targets.

Officials embark on ‘Plan B’ to regain fiscal footing
The government now has to seek alternative measures to the fiscal agenda in the referendum to compensate for the loss of potential savings that would have resulted from the two-year freeze on operational spending, a cap on public sector pension and salary outlays, a limit on public sector salaries and pensions as well as the phase out of special pension regimes. The government had estimated the referendum items to generate total fiscal savings of 0.7% of GDP this year and another 1.3% of GDP in 2004.

The government’s ‘Plan B’ likely will include a combination of below-inflation adjusted public sector salary increases, government spending freezes and cuts, a new pensions tax, a generalization of the value-added-tax (VAT) rate at 17% for products and services previously enjoying a special regime, widening the tax income tax base as well as a two-year extension of the 10% surcharge on income tax. In addition, the government is contemplating less orthodox measures of using the Central Bank’s international reserves to retire short-term public debt. The government estimates that the spending freeze and cuts will enable compliance with this year’s fiscal deficit target of 2.8% of GDP agreed to with the International Monetary Fund (IMF) under the terms of the US$ 2.1 billion stand-by agreement from 15 January 2003. Furthermore, officials remain confident in the legislative approval of the additional fiscal measures, which should help lower the fiscal deficit to the 2.5% of GDP target for next year.

Consensus Forecast participants have revised their fiscal estimates to account for the negative effects from the lost referendum, anticipating the fiscal deficit to close at 3.1% of GDP this year, which is 0.3 percentage points above last month’s forecast. Furthermore, next year panellists anticipate that the fiscal deficit will improve only moderately to 3.0% of GDP, as debt service outlays increase and military spending rises further.